VOSB and Franchise Agreements Explained

The U.S. Department of Veterans Affairs (VA) has issued a fact sheet on the impact of business franchise agreements on the verification process for veteran-owned small businesses. “Most franchise agreements seek to maintain control of the company in a manner which prevents the Veteran from making decisions concerning day-to-day operations and the overall direction of the company,” notes the VA, thus disqualifying the franchise owner from qualification under the VA’s verification standards.

“Franchises are not automatically excluded from applying for verification,” according to the VA fact sheet, but “generally, franchises’ business documents contain provisions which do not allow the Veteran or service-disabled Veteran owner complete authority in managing and controlling critical elements of the firm.”

In order to be verified as a veteran-owned small business (VOSB) by the VA’s Center for Verification and Evaluation (CVE), a business must be both owned and controlled by one or more veterans. Control means both the day-to-day management and long-term decision making authority for the VOSB, according to 38 CFR § 74.4(a).

While the CVE does not have an official definition for what a franchise is, CVE’s policy is to evaluate franchises no differently than any other company seeking verification. However, the VA fact sheet is straightforward as to the probable outcome of its review of a franchise: “To the extent the franchise agreement does not impose restrictions on the Veteran owner’s ability to manage and control the franchise, the franchisee may be found eligible. However, that is not usually the case.”